Good day, everyone, and welcome to the Northern Trust Corporation Second Quarter 2012 Earnings Conference Call. As a reminder, today's conference is being recorded. At this time, I would like to turn the conference over to Director of Investor Relations, Bev Fleming, for opening remarks and introductions. Please go ahead.

Thank you, Lisa. Welcome to Northern Trust Corporation Second Quarter 2012 Earnings Conference Call. Joining me on our call this morning are Mike O'grady, Northern Trust Chief Financial Officer; Rick Kukla, our Controller; and Allison Quaintance from our Investor Relations team. For those of you who did not receive our second quarter earnings press release or financial trends report by email this morning, they are both available on our website at northerntrust.com. In addition, and also on our website, you will find our quarterly earnings review presentation, which we will use to guide today's conference call. This July 18 call is being webcast live on northerntrust.com. We only authorize rebroadcast of this call as the replay that will be available through August 15. Northern Trust disclaims any continuing accuracy of the information provided in this call after today. Now for our Safe Harbor statement. What we say during today's conference call may include forward-looking statements, which are Northern Trust's current estimates and expectations of future events or future results. Actual results, of course, could differ materially from those indicated by these statements because the realization of those results is subject to many risks and uncertainties. I urge you to read our 2011 annual report and our periodic reports to the Securities and Exchange Commission for detailed information about factors that could affect actual results. Thank you again for joining us today, and let me turn the call over to Mike O'grady.

Good morning, everyone. Let me join Bev in welcoming you to the Northern Trust second quarter 2012 earnings conference call. Our second quarter results of earnings per share of $0.73 and a return on equity of 9.9% reflect continued progress on many fronts. Growth in trust, investment and other servicing fees was strong, driven by new business from both personal and institutional clients. Execution on our driving performance initiatives remains a critical priority, and we made further progress in the second quarter on both the revenue and expense side, and profitability improved with our pretax margin increasing to 27.7%. This performance was against the ongoing backdrop of a mixed operating environment. Equity markets were weak in the second quarter, following positive performance in each of the 2 preceding quarters. The S&P 500 was down 3%, and the IFA was down 7%. This weakness had a negative impact on the market value of client assets, as did the strengthening of the dollar. Assets under custody ended the second quarter at $4.6 trillion, down 1% sequentially but up 3% year-over-year, and assets under management ended at $704 billion, down 2% sequentially but up 3% year-over-year. Fees, overall, benefited from the prior quarter's positive market performance, given that some fees are calculated on the basis of month or quarter lag asset values. Foreign exchange volatility in volumes continue to be low, impacting our foreign exchange trading income. Interest rates remain low, placing continued pressure on our net interest margin and resulting in ongoing fee waivers on our money market funds, albeit lower in the second quarter than the first quarter. The U.S. economy's slow recovery has led to continued improvement in the credit quality of our loan portfolio. Nonperforming assets declined for the fourth quarter in a row, and our loan loss provision…

[Operator Instructions] And we'll take our first question from Alex Blostein with Goldman Sachs.

So I wanted to start with, I guess, your commentary on cost savings and the progress made so far. So if you strip out, I guess, a couple of one-offs, I mean, it looks like the pretax margin this quarter was around 29%, maybe a little over 29%, Mike, how should we think, I guess, about that as we progress through the next kind of 1.5 years? And what do you guys see yourself kind of finishing 2013 from a pretax margin perspective?

Yes. So clearly, you've seen, Alex, that we have had a focus on managing our cost and have had success in doing so for a couple of quarters here. We will continue to do that, continue to focus on that. You also saw the driving performance initiatives delivering the savings that we had hoped for. The breakdown there for this period was 40% revenue, 60% expense. So beginning to see more of it coming from the expense side of the equation. So that helped on the margin side. The other thing I would point out, though, is each quarter does have certain items that -- or they're seasonal or just impact particular quarter. So in the first quarter, as you know, we have Northern Trust Open, we have certain equity awards that get expensed in the quarter. So it's never going to be just a complete, smooth trend across all quarters but certainly, our objective is to stay on the path that we've been on in trying to manage those costs closely.

Got it. And then, I guess, the second part of the initiatives, and I'm not sure if that's come in through already. Maybe there's a little bit more to go, but from the revenue perspective, it looks like your fee rates increased almost across every sort of category, whether you look at C&IS custody fees, investment management fees or on PFS side. Can you help us understand, I guess, how much of that is a reflection of the new fee schedule? How much of that is a roll-off from the fee waivers? And is there anything else going on with the type of business that you're winning that just kind of comes in with a slightly higher fee rate versus what you've seen before?

I think you've hit on the key categories. So for PFS, no question, and we talked about it there. We are seeing the benefits from the new fee structure that was implemented on January 1. And I would say importantly there, Alex, is the fact that it's been executed in a way that it has essentially worked the way that we had planned it out. So from a client retention standpoint and from being able to maintain that fee level, it's gone well. I think on the C&IS front, you're beginning to see the positive impacts of a similar program on that front, albeit structured very differently. So that process, as we've talked about very much client-by-client, but we've put a very organized program around that such that we make sure that we're measuring not only how we roll that out but our progress on that front. And so you saw in this quarter some benefit on the fee side from situations where we've been able to have those discussions with the clients and be able to, what I call, realign the value proposition with them. So that -- those are the primary drivers. As far as the mix of business, I would say on the PFS front, if you look at the asset mix for that client base in the quarter, it was, for the most part, in line with where it was in the previous quarter. So not much of a shift, if you will, in the asset allocation. So it's largely consistent. And similarly on the C&IS side, I wouldn't say that there's any particular trends in the type of business because we are winning kind of across all the sectors. I would say that we've had particular success with hedge fund services, and so we expect that we'll have higher growth there, which will affect that mix.

Got you. And then just the last one for me. NII, I guess, obviously tends to be, I guess, a little bit volatile with the rates and the size of the balance sheet, but it seems like you guys exited the quarter with earning assets a little bit higher than the average. How should we think about the progression, I guess, of NII from here between, I guess, you trying to manage the NIM, and as well as the growth trends and the balance sheet overall?

Well, as you saw in the quarter, we saw the impact of when the assets do go down, the earning assets, during that time period. So essentially, what happens, there's a number of factors always but if you boil it down, on the funding side, we had lower interest-bearing deposits, and those are coming off on average about 24, 25 basis points for those. Those were largely being deposited at the Fed. So you saw, likewise, a similar decrease in the average balance of our Fed deposits. And those, as you know, are 25 basis points as well. So essentially, that part of the earning asset mix that's coming off is a lower yielding portion of it or spread for it. So that's what benefited primarily -- I would say, that's what benefited the net interest margin during the period. Going forward, as you correctly pointed out, Alex, we actually entered the quarter with a higher level. Having said that, it continues to move around just as it moved around in the first quarter. As our clients, both personal and institutional certainly, deal with the situations in the marketplace, both in the U.S, but certainly what we're seeing more of recently is in Europe with the euro, those balances can move around. So as I've said before, difficult to give you a particular trend that we're seeing and just we will continue to manage each component of both the funding side and the asset side to try to maintain the NIM.

And we'll now go to Ken Usdin with Jefferies & Company. Kenneth M. Usdin - Jefferies & Company, Inc., Research Division: Mike, I just wanted to ask you for a little more color on the Institutional Asset Management business. I know there was some help from fee waivers but you had a really good revenue result on down average assets. So can you talk a little bit about product mix in that business, mandate flows, et cetera?

Yes, as you pointed out, there were a couple of items there on the fee waiver front that helped in the market, helped a little bit. But we did see the impact of net new business on that. And if you recall, last quarter we talked a little bit about just the timing of when new clients come on. And so we did have the benefit of some of that activity happening earlier in the time period. So nice wins. As far as the mix, as I mentioned, we had a couple large wins in the index area. But if you look at our asset mix in the institutional business, as well as the personal business, very diversified, which is something that has been a conscientious strategy to move that direction. And I think you're seeing the benefit of that as the markets move around. Kenneth M. Usdin - Jefferies & Company, Inc., Research Division: Okay. Second question just on capital, you mentioned 12.9% on the Basel III under the NPR. That's -- if I'm recalling, that's not much of a delta. Could you just confirm that? But secondly, of the 13% still growing each quarter, there wasn't really that much buyback this quarter. When do we start to see the share count start to really come down? And how do you -- do you think any differently about future CCAR submission and capital usage?

Let me try to take those in a couple pieces. First of all, as far as the change quarter-over-quarter in that Basel III Tier 1 common ratio, the primary driver for the change is that during the period, we did, obviously, have a profitable quarter. And if you recall, we had 2 dividends declared in the prior quarter, in the first quarter, so all of that net income, or virtually all of it, essentially went to equity. So we saw an equity increase from that. As I mentioned in selling the auction-rate securities, that also reduced our risk weighted assets. So those were the 2 biggest drivers of the increase in the ratio itself. As far as the new NPRs that are out there, for us, as the advanced approaches bank, the NPR is generally aligned with prior guidance from the Basel Committee. There's certainly changes. So the simplified supervisory formula approach definitely impacts part of our risk-weighted assets. But on balance, the increases and decreases from that particular approach essentially have a neutral impact for us on a risk-weighted assets perspective. So that's how it's affected. To you next point on the share repurchase, we so far had been repurchasing the shares consistent with the capital plan that we submitted and was approved by the Fed, and we'll continue to do that. If you recall, we said that we would be -- we have the authorization to repurchase $240 million up to the end of the first quarter, so there's still $190 million remaining on that. And we will continue to look to repurchase according to the plan. Kenneth M. Usdin - Jefferies & Company, Inc., Research Division: Okay, great. And there's one little thing, just on other fees. You mentioned there's a miscellaneous stuff, was that a bit of an anomaly this quarter? Just give a little color on that.

Yes. So that category, as you know, does include a number of miscellaneous items. So it is difficult to forecast, whether it's internally or externally. As I mentioned, we did have a reduction in the commercial banking fees. And really what that is, is just there was less pure refinancing activity in the time period, and that's one of the drivers of fees for the commercial banking area. So frankly, that component in and of itself can change just depending on the level of activity. Beyond that, the year-over-year comparison, as I mentioned, included a gain that we had on a lease residual on the prior year period. So you have items like that, that just cause the numbers to move up and down. But I would say no particular fundamental change in what's in that category.

And we'll go next to Howard Chen with Credit Suisse. Howard Chen - Crédit Suisse AG, Research Division: Mike, just wanted to clarify 2 points on capital. One, do you have a Tier 1 common Basel III target and then second, is your expectation to exhaust that $240 million by March 2013?

So as far as the target, what I would say, Howard, is, similar to what we've said before, we don't have a specific target. We certainly like all the other banks to continue to work through all of the new rules and regulations, try to address those that we think are not appropriate or don't necessarily measure capital or risk in the right way. So that will continue to evolve and will need to continue to evolve with that and as to what the regulatory requirements are. We do feel that we are very adequately capitalized as you could imagine at this point in time. And we certainly have to look at the competitive environment or marketplace with regard to capital levels. So we take into account a number of factors. We do not have one single point target. And as you know as well, there are multiple ratios as well which not only the regulators in the marketplace but we also take into account. So that's on the target front. As far as the $240 million, that's our authorization. As always, we evaluate share repurchases based on circumstances at the time in the sense of our view on the state of the business, our capital levels, other alternatives, et cetera. But at this point in time, I would say, as far as the capital plan, our expectation is all else equal to continue to execute on the plan that we've submitted, which is up to the $240 million. Howard Chen - Crédit Suisse AG, Research Division: Okay, great, Mike. And then on the loan growth, you cited I hear you on the disciplined underwriting standards, but I was just wondering if the growth we've seen over the past few quarters is related to any specific initiatives that you have in place, or is it focused on any particular region or customer profile?

Sure. It's not a specific initiative. Having said that, where the loan growth has come from, Howard, is mostly from our commercial and industrial area. So we have had success in adding new clients on that front, and that's where you've seen more of the growth. There other categories on the personal side as well, but that's the largest driver. Howard Chen - Crédit Suisse AG, Research Division: Great. And then final one for me. I asked you this last quarter, I thought I'd check in again. Just post some of the fee schedule adjustments you've made as part of a long-term plan, are you seeing any customer attrition?

It's actually been, I would say, very good on the customer attrition front. And I give credit to my colleagues both on the personal side and the institutional side for just how they've executed the new fee arrangements on the PFS side. And then certainly with C&IS, how they're actually going about this in a very organized, programmatic way.

And we'll go next to the Mike Mayo with CLSA. Michael Mayo - Credit Agricole Securities (USA) Inc., Research Division: I'm looking at Slide 2. So assets under custody are down 1%, assets under management are down 2%, but your revenues are up nicely, the processing asset management fees are up. Is the sole reason the new fee schedule, or is there something else happening?

The new fee schedule is definitely a part of it. It's one of the factors. Another factor is certainly that relative to markets, fees -- some of our fees, Mike, as you know on a quarter-like basis, some of them are on a month-like basis. For example, in the PFS region. And there are also other fees that are not necessarily asset-based. So as much as I do think there are longer-term trends in those ratios, they're not necessarily lockstep from quarter-to-quarter. But I would say that you have those factors that, overall, it's also the underlying just growth of the business, net new business that we're seeing over time.

And also, Mike, I would just add the impact of the fee waivers as well, which were lower this quarter than they were last quarter. So that would be another element as well. Michael Mayo - Credit Agricole Securities (USA) Inc., Research Division: Do you want to give any cautionary language around the upcoming quarters because to the extent that the fee reflect the onetime step-up and the markets weren't as strong and you have a lagging pricing, does that mean the second half of the year might not be as good?

Definitely don't have a specific view nor would we give one on the second half of the year, Mike, but needless to say, and everybody on this call knows the environment that we're currently in continues to be challenging with regard to interest rates, FX volatility, choppy equity markets. So we continue to be in what I consider a challenging market, but don't know what the rest of the quarter will hold for us. Michael Mayo - Credit Agricole Securities (USA) Inc., Research Division: Are you getting some sort of flight to quality benefit? Why are you getting the new business that you're getting?

We think that's part of it, but we think this is part of our broader franchise and strategy and brand. So it's everything, and it's a lot of effort in trying to add to our business and build on it. Michael Mayo - Credit Agricole Securities (USA) Inc., Research Division: And then lastly, you saw that Goldman Sachs looks to expand its private bank. I mean, to me, it says they're going after your client. And then you have JPMorgan looking to accelerate its growth in the private bank, how do you think about those longer-term threats?

Yes, well, they're also near-term competitors for us in the sense that we compete against both of those institutions right now on the personal side. We did note, of course, the article yesterday with regard to Goldman Sachs. But I'm not sure that, that necessarily is going to change the competitive environment. Frankly, we think that we're in a very attractive business, and we're not surprised that other banks would look to try to compete in this business. But we feel pretty good about our own competitive positions and have been doing it for quite a while.

And we'll go next to Brian Bedell with ISI Group.

On the -- just on the balance sheet. If could you talk a little bit about -- Mike, you were talking about obviously trying to keep the net interest margin roughly stable. If you could talk about some strategy as we move into this second half? Again, not predicting it for the second half, but with regard to what types of rates you're reinvesting on, any GSE part of the book? And also, the improvement on yields on the other securities going from 121 to 138, what was the main driver of that?

Okay. Let me try to take it here, Brian. As far as overall and how we look at it, as I mentioned when I kind of break down the balance sheet for you. First, this is part of the loan portfolio. There's no question that the loan growth that we've seen in this quarter and year-over-year is a positive when it comes to the yield on our portfolio or our balance sheet overall. So that is a positive and to the extent that we can continue to grow that with our clients, we would look to do that and would expect to get a positive benefit on that portion of the portfolio. In the Securities portfolio, you asked the question as to where we're reinvesting in the quarter? Reinvestment rate was basically in line with the yield on the portfolio right now. So by balancing duration, because you saw the duration didn't really move in the quarter in different types of securities, we been able to maintain that approximate 90 to 100 basis points on the Securities portfolio. And then finally, on the last portion there, which is the deposits with bank, that part, very short term in nature. As I mentioned, that is an area where it's certainly a challenge, given that it's going to impact -- be impacted by short-term interest rates. In the second quarter, we all know that longer-term rates came down more significantly than the short end, the very short end of the curve. So much of it just depends on what happens on the very short end of the curve. And we are first and foremost focused on liquidity and credit quality as we make those placement decisions.

Okay. Yes, that's very helpful. And then just if you could talk a little bit about the initiatives or the efforts to reprice the custody and fund administration business. I know it's more -- you make it more of an effort with the pension plan. If you can talk about where you stand in that relative to -- earlier in the year, the conversation is going better. We started to see more effective repricing of that.

Yes, let me take that and kind of give you a description, if I could, of what we're doing on that front because you are correct. I think that this area is picking up more momentum relative to on the personal side, which started right out of the gates this year. But as I've mentioned a number of times, this is a very structured global program that we've rolled out that has multiple work streams to it. The first one is definitely trying to assess the individual relationship. So much has changed over the last several years as we know in the environment. So it's trying to line up the services we're providing now relative to what the expectations were before. So a lot of analysis goes on that front end. The next piece of it is we've actually been training all of the RMs, if you will, in how to handle these situations with the clients. And so, right at this point, for example, there's over 200 of the RMs that have specifically gone through the program in order to make sure that we're doing this in a way that we maximize on client retention. And then as far as client communication, we've been having those discussions with the client. And I would say roughly now, we probably had about 1/3 of the conversations that were ultimately going to have, and we're tracking those very closely. Not just that we're having the conversations, but the type of feedback that we're getting and using that knowledge, if you will, for the future conversations that we have. And then finally, I would say that we're trying to do this in a way that it isn't just a once every several years that we look to align or realign the value proposition…

That 's great. That's very helpful. Just lastly, on the new business on the C&IS custody and fund admin side, can you just give us a sense of where you're seeing it mostly, I guess in terms of global, in terms of hedge fund administration and middle office outsourcing relative to straight custody arrangement?

Yes, I would say, it's a very nice mix across what you said there. So we are winning new business. I mentioned the growth and success we've had in Australia. So certainly Asia Pacific has been a positive. In Europe, we had a number of wins during the quarter in Europe. And then likewise, in the U.S., in North America, as far as the type of business, as much as it continues to be broad-based, I would say we've had particular success, as I mentioned, with the hedge fund administration part of the business there. So relatively broad-based, and I would expect that, that type of mix will continue, although you never know where you're going to be more successful.

And we'll go next to Greg Ketron with UBS.

Mike and Bev, question on the margin. I know you covered this a number of different ways, Mike, but when you look at the earning asset yields and think about repricing risk, is your sense that we're pretty much through the repricing risk as you look across the loan book and into the securities area. And if not, and if you go to the interest-bearing fund side, you're down to 25 basis points that you're paying net cost on interest-bearing liability side. Is there a further room that you think you could reduce this cost?

Yes, so if we go through it the way you suggested, first of all, on the loan side of the equation, we did see the yield come down there a little bit as we do continue to see some refinancings. And the refinancings are coming at lower rates. However, I would like to think that we're towards the back end of that certainly. It doesn't mean that there can't be more pressure on that, but as I even mentioned the impact we've seen on the commercial banking fees, it's because most clients have -- who are interested in refinancing, whether that's personal or institutional, have largely done that or had the opportunity to do it. So I'd like to think bank end on the loan portfolio side of it. The Securities portfolio, again, is more market-driven. We're certainly continuing to look at how we balance duration in that portfolio in a way to maintain the yield as best we can. It certainly gets challenging as we see treasury rates come down essentially across the curve. And then on the shortest end, as far as the deposits, we have been able, certainly in the U.S., with the Fed deposit, the 25 basis points, that certainly provides some level, if you will, I think not only at the Fed but also in the marketplace for the short end. As we've seen, though, in Europe, with the euro now overnight rates being 0, that has an impact on the marketplace and can bring those short-end deposit rates down. So that's how I would see the kind of the trends, if you will, that we're seeing on the asset side. On the deposit side, as you mentioned, we're already relatively low on our deposit rates and our funding side. Is there room to go lower? Probably a little bit, depending on where market rates go based on some of the comments I just made previously where we see on the other side of the equation. But there really isn't that much room on the funding side as well. So that's the balance or the challenge that we have on that front.

Okay. That's helpful. And looking down the road, which seems like a long ways off and rates eventually do go up, say, if the short end were to go up 100 basis points, you have the money market fee waivers and then the balance sheet repricing. Do you have a sense for how much asset sensitivity you would have under that scenario?

Yes, we are asset-sensitive as you pointed out. And without quantifying it, I would say that as you pointed out, the money market fee waivers which -- we give those numbers so it's easy enough to quantify what those dollars are that essentially would -- if we hold the waivers there. And I think, to your point, if we saw 100 basis point move in there, our expectation is that we would no longer have those waivers. So you can quantify that. And then on the margin side of the equation, we're at 1.28% right now. Our historical average is closer 1.75%. I don’t necessarily think if market rates go up 100 basis points that we would see that full impact, but again I think there's -- anybody could do math around what the impact would be to the extent we're even to get a 25 basis points increment in our net interest margin.

And we'll now go to Cynthia Mayer with Bank of America Merrill Lynch.

On the asset management side, can you give any sense of whether the flows are increasing or decreasing relative to previous quarters? And also, are they mostly passive at this point?

Yes. I would say that because of the very diversified nature of our assets under management, there are positive and negative flows depending on the category. There's none of them, Cynthia, where I would say we're seeing significant flows one way or the other. I do think when you look at our overall levels though, it does indicate, particularly given that markets are down, that on a net basis, we are continuing to win business.

Okay. And any -- what's your outlook there in terms of, I guess, in terms of private client flows?

Private client flows, again, I would point you the same direction as far as just looking at our asset levels with the markets down sequentially, the assets were also down sequentially but not as much as the markets. Some of that is mix and some of that though also because the net new business has been positive. And again in this quarter, it was likewise a very good quarter.

Great. Okay. And then just a quick question on other operating expense. I apologize if you mentioned this, but what drove most of the sequential decline? I think in the release it mentioned reduced business promotion other miscellaneous expense, but I'm just wondering is that a sustainable level, or is there something else in there?

Well, Cynthia, the sequential quarter comparison this year and in recent years would've primarily been the result of the Northern Trust Open.

That drives the majority.

Right. Right. So I should really look at it year-over-year.

Correct.

Okay. And last question is just on the new fee schedule for PFS. Is there, under the new fee schedule, more of a delta in fees between fixed income and the equity than there used to be so that if equity markets were to rise or people were to become more risk-drawn, would you get more of a lift there than you used to?

Well, I'm not going to necessarily comment to the specific levels of the fees on the products, Cynthia, just because I don't have them and I don't know them. But I would say that I -- that it does change that dynamic that you're talking about, and it is something where we move from a bundled fee, which to your point is going to be more kind of on average, if you will, to one that now is more differentiated because as much as we have an account management fee, that account management fee is smaller, obviously, than what the overall bundled fee was. And then the remainder are based on products. Now those product fees are very much just market-based. So equities versus fixed income and all the various different types of products are just consistent with market level fees. So to your point, you could make whatever assumptions you wanted about changes in markets, and I would have the expectation that our fees would behave differently than they did under a bundled fee.

And we'll go next to Gerard Cassidy with RBC Capital.

Mike and Bev, question for you coming back to capital. Clearly, you guys have one of the best Tier 1 common ratios out there, which obviously you want to maintain. Once we all understand what the final capital rules are, do you think you would come out to shareholders and point out where you want to be relative to those rules, so we could look at the return on equity and get some judgment on how you're going to get to that 10% to 15% target that you have?

Yes, I think as you pointed out, Gerard, I think you made the phrase, once we all understand how all the rules are going to work, I think we and everybody else looks forward to that day. And in fairness, not only are all the banks but the regulators I think are working through this as well to get to the right place. So that is certainly something that we continue to not only monitor in the sense of how are the rules developing but then to your point, where do we want to be relative to the regulatory required levels. So that's also evolving. And then as I've mentioned earlier, we don't necessarily have a target ratio so we don't pick one particular ratio, and then say that we try to drive everything because we do think that it is a multidimensional, multi-variable situation that you need to look at. I mean, obviously leverage ratios are very different than risk-based ratios and you have different risks that required capital within the risk-based ratios depend -- based on the advanced methodology. So I think it's tough to necessarily have a single point target. And we also take into account, and will take into account at that point what I consider the competitive marketplace, right? So we have to make sure that we are positioned from a franchise standpoint for our clients and for our businesses in a position that continues to give clients and prospective clients the appropriate view on Northern Trust that we have a very strong balance sheet and strong capitalization. So my point in all that is there's a lot of factors even now, and difficult if not impossible to predict how those are going to develop and then based on that, determine where we would end up with that. And so we'll continue to take all that into account as we think about the appropriate amount of capital for us in order to also generate the return range that you just mentioned.

In terms of, I guess this is more philosophically right now because things are still uncertain, both in the macro environment we live in plus with the rules. We all don't know what the final rules are. But once we get there, conceptually, could Northern actually look to give back to shareholders on an annual basis upwards to -- if the capital is not needed, again, you're at the level you feel very comfortable at, give back to shareholders up to 100% of earnings and buybacks and dividends? Or is that something that conceptually or philosophically just wouldn't fly?

Well philosophically, the way we look at the dividends is that we do provide a certain portion of our earnings back to our shareholders on ongoing basis. The way we look at share repurchases though is more around our capital structure at the time or the level of capitalization and other alternatives. And so to the extent that we feel that we are either below where we want to be or above where we want to be, that can affect the amount of share repurchases that we think are appropriate in returning capital to shareholders. And the outcome of that could certainly be that if you calculate a ratio of whatever actions you take, it could be above 100% of our net income. So in other words, we don't look at all of our capital actions just relative to net income. I view that more as kind of an output for the overall capital return to shareholders. It's more around making sure our capital position is in the right place. And so the answer to that would be yes.

Good. And then another source, of course, of excess capital, as acquisitions with Northern over the years has done successfully, what are you -- are you guys hearing anything in terms of opportunities that in the spaces that you look to, to grow through acquisition, or is it pretty quiet right now?

Yes, there's certainly activity. I mean, we saw one of our competitors make an acquisition yesterday in a space that we compete. So there is some level of activity. I expect that we'll continue to see that, but there's nothing I would say, Gerard, that's unusual in the sense of either being extremely low or quiet or being extremely active. To me, it's a natural flow of opportunities, which we certainly take a look at and evaluate and determine if we think that they can add to the franchise. If they fit strategically or provide for us the capability that we don't have and if we can do so in a way that we find financially attractive.

And then just finally, a side question, when does the contract for the Northern Trust Open come up for renewal with the PGA?

Gerard, I might have to follow up with you on that. I think we have 2 or 3 more years, but I'm not positive on that.

And now we'll take our last question from Andrew Marquardt with Evercore Partners.

Just back to expenses, can you just give us an update on the driving performance, and I know you're, I think, on track to meeting your goal of over 50% this year. But given the tough kind of macro environment that all are facing, is it possible to have additional levers there to still meet what I think you said in the past in terms of getting to positive operating leverage this year, is that possible?

The way I would answer that, Andrew, is the driving performance initiative that we have, the focus there is, as we've said, to be more productive over time both on the revenue side and on the expense side. On the expense side, it's to do things that will produce recurring benefits. And so all of those categories are things that we expect to continue going forward. Depending on the economic environment and the market environment and financial performance, we also have to look at near-term levers, as you mentioned, that can be pulled in order to react to that, but those are viewed in a separate category. So regardless of the environment, we'll continue to execute on driving performance and then beyond that, we also are certainly focused on the current environment to determine if there's other things that we need to do. So hopefully, that addresses your question there.

Got it. And do you think that in this type of environment where it does seem like the top line is getting tougher, is it possible, is it reasonable to expect positive operating leverage as the driving performance is currently laid out? And what kind of run rate you're at right now? Should we expect that?

Sure. Well, operating leverage obviously has to do with revenue growth rate and our expense growth rate. So yes, it becomes more difficult to the extent that you're in a challenged revenue environment. But that's why we've launched into driving performance earlier this year is because not knowing what that revenue environment is, we want to be able to create positive operating leverage even in a difficult revenue environment. And I think you saw an example of that this quarter on a sequential basis and on a year-over-year basis but sequential basis where we had positive operating leverage about 3%. So that's still the focus, is to try to achieve that, not knowing or not being able to predict exactly what happens on the top line.

Got it. So it sounds like it's still someone on the table that may be less confident in getting to positive operating leverage this year, is that a fair characterization?

I would just say that everything that we've talked about with driving performance and improving productivity and improving profitability, absolutely still on the table, we feel very good about how we're executing on it, and that hasn't changed. What we don't know is what's going to happen in the broader environment the back half of the year.

Great. That's helpful. Just one last to kick that question on credit and asset quality. Obviously, not that big. Obviously, a little bit I guess flat in terms of credit cost this quarter. Is that a good kind of run rate? Sorry, if I missed that, if that was commented earlier in terms of what -- how should we think about the provision cost?

Sure. So as you mentioned, we had $5 million of provision in the quarter, and that reflected the fact that our nonperforming loans came down 9%, nonperforming assets down 7%. So continued positive trends. We had $16 million of gross charge-offs in the quarter, and we had recoveries of $13 million. So net charge-offs only $3 million, which we had a good quarter on that front as well. In the first quarter with $6 million, so that's what that reflects to the extent that we continue to see that -- those types of trends, I would expect that the provision will continue to track like that as well. What we can't do, as you know, is predict what is going to happen on the credit front. But so far, as I did mention a little bit earlier, Andrew, this is our fourth quarter in a row of positive developments on the credit front. It's not always that smooth. It can tend to be a bit choppy. So difficult to say if that trend will continue, but we certainly hope so.

Lisa, I believe you said that, that was the end of the questions. So we thank you for joining us today and look forward to speaking with you on October.

Okay. Thank you very much.

Ladies and gentlemen, that does conclude today's conference call. Thank you for your participation.